Local state takeover as multiple rent seeking in private business

This chapter examines an innovative configuration of rent seeking in China’s state-business relations that can be called “local state takeover” (state takeover). It consists of a private firm getting tight control of a state agency’s administration to maximize gains from rent, effectively turning the agency into a profit center of the firm. This is illustrated by the case of a massive smuggling operation based in Xiamen, a special economic zone in southeast China. It consisted of collaboration between a private firm called the Xiamen Yuanhua Group (Yuanhua Group) and hundreds of officials in dozens of state agencies-that is estimated to have cost the state billions of renminbi in lost tariff revenue during the 1990s. The analysis examines how an entrepreneur leveraged a web of patron-client ties into the takeover of a local customs house to profit from multiple forms of rent. The findings extend the author’s earlier insights on the embeddedness of China’s private business in ties with officialdom to document a further layer of institutional complexity and new power distribution.1